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How Russia Is Slicing Up The State Pie

July 26, 1992

Economics

HOW RUSSIA IS SLICING UP THE STATE PIE

In Russia today, prices are rising 15% a month, the budget deficit has climbed to 17% of output, and the central bank is printing rubles at a fast clip. These seem to be rather flimsy elements on which to base a market economy. So the government in Moscow is pinning its hopes on privatization, the transfer of state enterprises to private ownership. The International Monetary Fund may be worried about Russia's fiscal and monetary policies. However, "privatization is a lot more important than macroeconomic stabilization," says Harvard University economist Andrei Shleifer, an adviser to the Russian government's state committee for property management, also known as GKI. "It's the only way you manage to build some foundations for a market economy."

With a decree signed on July 1, President Boris Yeltsin launched privatization in earnest. State enterprises must establish joint worker-management teams to propose to GKI by Oct. 1 how the enterprises will be privatized. And by Nov. 1, state enterprises must convert to joint-stock form. Then, their actual sale can begin.

The Russian government's intent is to sell control of companies in "an open, transparent, and competitive manner," as GKI officials put it. For an economy that has long conducted business in a closed, opaque, and anticompetitive fashion, that's a tall order. How to divide the spoils of the state when there are so many interested parties? Managers, workers, and local officials might deem themselves rightful owners of industry, while teachers and doctors might figure they have a stake, too. So the program tries to satisfy all "stakeholders" by giving everyone a chance to gain a piece of the pie. One key component is the distribution of vouchers to all Russian citizens in order to enable them to become property owners.

There are three basic methods for privatization, all of which, initially at least, leave the state with a major stake in industry. First is a plan that would give--free of charge--25% of the shares (nonvoting) to workers, sell managers 5% of voting shares at book value, and permit the purchase of an additional 10% at discount by workers and managers. Then there's the possibility of workers and managers buying a controlling 51% of an enterprise. Thirdly, there's a special option for small enterprises, under which managers and workers could acquire up to a total of 40% within a year, provided they meet commitments to shore up the enterprise.

Yeltsin's July 1 decree opens the door for a fourth variant, by which managers could form trust companies to take enterprises private. Such trust companies could result in far more managerial domination of the privatization process, but GKI has not yet devised guidelines for this procedure. In addition, the government wants to establish trust companies to take stakes in the auto, coal, and oil industries to prevent mass bankruptcies and unemployment.

VOUCHER SYSTEM. Presented as a critical counterbalance to these plans is the voucher program, which will enable all citizens to purchase some of the remaining shares held by the government. "Vouchers will produce additional pressure on local authorities," says Anatoly B. Chubais, chairman of GKI, because citizens who want to use them at auctions will urge officials to conduct sales of enterprises. Foreign bidders are expected to be buyers at auctions as well.

Privatization has begun on a small scale in Russia, with an estimated 8 billion rubles' worth of sales to date, or $61 million at the current exchange rate of 130 rubles to the dollar. Proceeds are to be divided between the federal government and regional and local governments, giving local officials an inducement not to block sales. GKI officials aim to sell off one-third of state enterprises by 1993, one-half by yearend 1994, and as much as two-thirds by yearend 1995. That is highly optimistic, especially considering the Marxist injunction against private property that has prevailed in Russia for nearly 75 years. But, observes Maxim Boycko, economist at Moscow's Institute of World Economy & International Relations and an adviser to GKI: "Today, nobody is discussing whether to privatize or not, which is already a big achievement from half a year ago." Out of such small steps is a new economy gradually being built.Karen Pennar and Rose Brady in Moscow